Britannia Report ““ Audit Report

Here is the full text of the Audit Report into the sale of the Britannia Stadium shares by Stoke-on-Trent City Council. Analysis next.

Covering Letter:

Dear Councillor,

Please find attached the Council’s Internal Audit report into the decision to sell the Council’s shares in the Britannia Stadium.

This report will be followed by a report by the Council’s District Auditor (DA).

The DA’s report will be finalised when he has concluded discussions with named individuals in the report. The Council understands, at this time, that this will not be a Public Interest report.

The Council understands that the DA has concluded that:

“¢ the Internal Audit report has been carried out thoroughly and to the appropriate professional standards
“¢ it is an accurate representation of the facts, based on the information available
“¢ there is no evidence of any financial wrong-doing
“¢ there is no evidence to suggest that the council did not receive reasonable value for its shareholding.

The DA has, however, concluded that there were issues with the Council’s prevailing governance arrangements and processes, and these will be made clear when the DA’s report is issued.

Both the Council’s Internal Audit report and the DA’s report are due to be discussed by the Council’s Audit Committee at its meeting on 8 February 2010 but I am of the view that all members should have an opportunity to review the Council’s Internal Audit report prior to that
Yours sincerely,

Paul Simpson
Director of Central Services and 5151 Officer


Internal Audit Report January 2010

Sale of City Council Shares in Stoke-on-Trent Community Stadium Development Company

1. Introduction

1.1 Following a request from the former Interim Chief Executive, Internal Audit has looked into the above matter and I am now able to provide the following information.

1.2 The information is based upon examination of documents provided and conversations with existing City Council officers who played a significant role in the process. Discussions have also been held with officers who were actively involved in the process but who are no longer employed by the authority (Steve Robinson, former Council Manager/Chief Executive, Julie Gill, former Director of Central Services and Kelvin Turner, former Head of Finance).

1.3 Discussions have been held with Michael Tappin, former Councillor, and at the time, Leader of the Labour Group and portfolio holder for Resources; and Councillor Roger Ibbs, at the
time Leader of the Conservative and Independent Alliance Group. Clarification has also been sought from the Audit Commission.

2. Work Undertaken

2.1 Initially a copy of the report to Council (14 June 2007) setting out the proposal to sell the shares was obtained together with the supporting minutes.

2.2 To obtain further details, discussions have taken place with Gerry Clarke (Principal Solicitor) and Robert Thorley (Assistant Head of Finance – Corporate Accounting), officers who were involved in the process of drafting the report. They were able to provide a number of documents that provided essential information. Auditors have also met with Kelvin Turner, former Head of Finance and section 151 Officer (April – October 2007) and a meeting with Steve Robinson and Julie Gill, was held in December 2009.

2.3 Part of the payment received for the sale of the shares was by way of a dividend. In order to investigate the legality of this process, advice was sought from Chris Parry, Legal Services (Senior Solicitor).

2.4 In order to consider the decision making process, the Schemes of Delegation for 2006 and 2007 have also been examined.

3. Background

3.1 In 1996 the Council invested £3.14m in Stoke-on-Trent Community Development Stadium Company (SDC), for which it received 1,440,000 shares in the Company. Since that time there have been several attempts by the owners of Stoke City Football Club to purchase the City Council’s shareholding.

3.2 On 16 May 2007 an offer of £4.5m in stage payments, plus £500,000 in kind benefits for the sale of the city council’s shares in SDC, was discussed by representatives of Stoke City FC and the Council Manager/Chief Executive.

3.3 On 14 June 2007, the City Council resolved to sell its shareholding in Stoke-on-Trent Community Stadium Development Company Ltd to Stoke City FC Ltd for £4,500,000 plus £500,000 in the form of agreed ‘in kind’ community benefits.

3.4 On 21 December 2007, the share sale was completed and a dividend payment (£480,000) and the first instalment (£1,520,000) were received by the City Council. A further instalment of £1,250,000 was received in December 2008, and the final payment, again of £1.250,000, was received on 21 December 2009.

4. Executive Summary

4.1 Previous owners of Stoke City Football Club made a number of offers to purchase the City Council’s shareholding in the Stadium Development Company. Several offers were received and rejected by the council until in May 2007 an offer in the sum of £4.5m plus £500,000 community benefits was made by representatives of Stoke City F.C. (8.1)

4.2 The council originally invested £3.14m and subsequently received £4.5m, which included £480,000 by way of a dividend payment, in addition to in kind community benefits. In cash terms the council received an additional £1.36m over and above its original investment. The funding of the new stadium through SDC also facilitated the regeneration of what was previously derelict land. There is no evidence to suggest that the council did not receive value for money in the sale of its shareholding in the company (9.2)

4.3 Under the council’s prevailing governance arrangements, at the time the deal was agreed, the Council Manager/Chief Executive’s post was one half of the Executive that could have taken the decision. The constitution gave the Council Manager/Chief Executive the authority to negotiate and conclude the transaction without any reference to full Council, nonetheless he took the decision to report the sale of the shares in SDC to full Council in order to gain support for the proposed sale. (8.5)

4.4 On 16 May 2007, it was established that the council would accept instalment payments for the sale of its shareholding in SDC. Many further discussions took place regarding the details of the instalments. The issue of instalment payments was not included in the (14 June) report to Council, as the details had not been finalised and the report was to concentrate on principles rather than details. Whilst the sale agreement was being compiled, evidence suggests that the payment terms were amended such that the initial payment on completion reduced from £3.14m to £2m. (8.1) (10.2)

4.5 In light of the information available prior to the Council meeting of 14 June, details could have been included stating that discussions were ongoing. Had the report included that payment was to be made by instalments (excluding interest), this additional information may have prompted further debate at Council and could have affected the final resolution. Kelvin Turner has explained that the details were not included because they hadn’t been finalised. The report was one of principle, not detail, and set out a summary proposal at that stage. His intention had always been that the details (especially the details relating to the £500,000 in kind benefits), were to be reported back to the Executive and Members’ Board. (8.4), (10.1)

4.6 From evidence available, and discussions with members and officers present during 2007, it appears that the two senior members involved in the authorisation to endorse the share transfer, were not aware of instalments/stage payments until the day of the completion meeting (21 December 2007).

5. Other Matters of Note

5.1 The report (14 June 2007) agreed to the sale of the City Council’s shareholding (“subject to the necessary contractual detail”). Whilst it did not delegate authority to Directors to “further
negotiate” the terms of the sale with the Football Club, it was the view of senior officers that such authority was implied within the Scheme of Delegation.

5.2 The Elected Mayor gave assurances to Council (14 June 2007) that some detail would be reported back for future executive decisions. From records provided, there is no evidence that such reports have been taken back.

5.3 The amount of the initial payment and subsequent instalments varied on a number of occasions between May and December 2007.

5.4 Under the prevailing constitution in light of the decision regarding the original proposal, it would seem to have been good practice, although not necessary, to report back to full Council regarding the outcome of the subsequent negotiations and the detail of the final payment terms.

5.5 The declaration of the dividend raises the issue of whether the authority was entitled to it by rights of being a shareholder, rather than it being used as part payment of the £4.5m. The matter has been referred to Legal Services for an independent view. .Based on the information that was provided, the conclusion of the Senior Solicitor was that ‘I cannot say that the dividend was unlawful’.

5.6 Calculations of the interest forgone over the period of the instalment payments, amount to approximately £180,000. It was the view of the then Director of Central Services that the decision to accept the final terms of the sale, fell within the (Chief Officer) Scheme of Delegation. (10.4), (10.8)

5.7 Neither of the Schemes of Delegation (2006 and 2007) prevailing throughout the share sale process state explicitly the £value levels which apply to chief officer decisions. However officers have explained that, as with several other delegations, such authority is implied.

5.8 Whilst various calculations have been carried out to estimate the likely value of the Council’s original investment had interest been applied, no reference to the rate of return used is reported in either the Council report or the minutes.

5.9 The Council Manager/Chief Executive recalls taking advice from Legal Services in order to clarify whether the sale could be finalised without the need to return to Council. (10.10)

5.10 In May 2007, in addition to Stoke on Trent City Council’s unique constitution, the formation of the Elected Mayor’s new coalition and Executive and Members’ Board introduced new roles for senior members. The Executive and Members’ Board assigned portfolio roles to nine elected members, two of whom were the then Councillors Tappin and Ibbs. Councillor Ibbs was already a director on Stoke on Trent Community Stadium Development Company and in
August 2007 Councillor Tappin was nominated to join SDC as a director. At that time Councillor Tappin also sat on the Board of Stoke on Trent Regeneration Ltd. In addition both members also held the office of group leader for their respective political groups.

5.11 Both Councillor Ibbs and Michael Tappin hold the view that there was never a conflict of interests in their roles as elected members of Stoke on Trent City Council, directors on the Stadium Development Company, and Stoke on Trent Regeneration Ltd. They saw their role as custodians of the city council’s interests and whilst they held several roles, their primary role was always to ensure that the city council’s interests were foremost in all decisions.

6. Original Investment

6.1 A report to the Policy Committee in September 1996 provided information to Members regarding the development of a new Community Stadium at Trentham Lakes. It explained that under Section 33 Local Government and Housing act 1989, the Council would be investing in the newly formed Stadium Development Company.

6.2 The Council subsequently invested £3.14m, in return for which it received 1,440,000 shares in Stoke-on-Trent Community Development Stadium Company.

7. Initial Requests to sell

7.1 During 2003 and 2004 there were ongoing discussions between Stoke City FC and the City Council before, under a new chairman, a revised offer of £3.14m plus ‘in-kind’ benefits of £500,000 was made by the Club in December 2006. In response (March 2007), having had
several discussions with various members, the Council Manager/Chief Executive set out that the offer was not acceptable and stated that “we therefore decline the offer made”.

7.2 Following the rejection of the above offer, the Council Manager/Chief Executive was asked to look into the matter to secure a better deal. No reports regarding the various offers to sell
the shares were taken to Council.

8. Agreement to Sell

8.1 From the documents examined, it has been established that an offer was made by the club on the 16th May 2007 for £3.795m plus ‘enhancement’. Later that day, Steve Robinson met with Peter Coates and Tony Scholes and suggested their offer should be in the region of £5m, including £0.5m ‘in kind’ benefits as a concession to the club. In the negotiations it is understood that the purchase was also offered as staged payments (instalments) as it was a significant divergence from the original offer. The deal, i.e. £4.5m, staged payments and £0.5m ‘in kind’, was agreed in principle (by Peter Coates and Tony Scholes) subject to:-
a) The deal being done quickly
b) The Council using its good offices to encourage Stoke Regeneration Ltd to sell its holding on similar good terms

8.2 Following the May meeting, Steve Robinson recalls that he briefed Councillors Ibbs and Tappin on the emerging details of the improved offers. His recollection is that he mentioned that payment by instalments was something that the Club were keen on, and that it would be worked out as part of the details of the work as it was completed.

8.3 An e-mail sent from Robert Thorley to Gerry Clarke on the 23 May 2007 confirms that the sale of the shares had been agreed in principle by the Council Manager/Chief Executive and that payment was to be made in instalments.

8.4 Following the agreement set out in Robert Thorley’s email, he drafted a joint report (of the Chief Executive and Head of Finance, as section 151 Officer) to Council. This was subject to approval by Kelvin Turner (see 10.1). Records show that details were originally included stating that payment for the shares was to be made in instalments. As there was no final decision on instalments at the time of writing the report, they were not included. Kelvin Turner’s intention was that once the details had been finalised, they would be reported back to the Executive and Members’ Board, especially as the £500,000 in kind detail was the major issue which members had focused upon at the 14 June meeting.

8.5 Under Stoke on Trent City Council’s unique constitutional arrangements, the decision making authority within the council rested with the Executive (Council Manager/Chief Executive and Elected Mayor), with all other Councillors performing effectively a scrutiny role on items such as this. Whilst the decision (to agree to the sale of the shares as proposed by the Club) could have been made by the Executive; Steve Robinson felt it was good practice to take the report to full Council. Additionally he felt that it was important that the new administration (specifically the new Executive and Members’ Board approach), gained a good start and that there was not a strong opposition to the proposed sale. The
report sought to obtain political buy in as opposed to being a necessity. The Council Manager/Chief Executive viewed the report as agreeing the overall price, not the structure of the deal; the key factor being the value being achieved as this had been a key reason for the failures to sell the shares before this date. Following the (14 June) meeting, negotiations continued, although the Council Manager/Chief Executive’s personal involvement reduced.

8.6 The minutes of the Council meeting (14 June 2007) record that the Elected Mayor explained that the City Council was being asked to agree the fundamental deal and he gave assurances that the detail would be worked up and some of it would come back for future
Executive decisions. From the minutes, it is not clear what detail the Elected Mayor was referring to when stating that some of it would be reported back.

8.7 Both Steve Robinson and Kelvin Turner recollect that leading members were briefed throughout the process and it is Steve Robinson’s view that he did mention to them that payment by instalments was something the Club were keen on. Kelvin Turner was present on a number of occasions when Councillors Ibbs and Tappin were briefed on developments.

8.8 The view of Michael Tappin and Councillor Ibbs is that they were unaware that the agreement to sell included staged payments; they only became aware of these details after having agreed to the transfer of the shares on 21 December 2007.

9. Value for Money

9.1 The report of 14 June recognises the difficulty in placing an accurate and objective value on the Company’s worth. But having considered several factors, it sets out the view that the Chief Executive and Section 151 Officer “consider (the offer) to be a good one that is commensurate with their worth.

9.2 From discussion with Kelvin Turner, he felt that the price had represented a good deal. His recollection was that had the Authority invested the original amount of £3.14m, it would have had a value of approximately £5m. There is evidence to support this in the form of an e-mail response provided by the Treasury Accountant in January 2007. In addition there is a document (undated) which highlights potential returns on the original investment of £3.14m
since 1996 using various methods of calculation. This indicates figures of between £5.15m and £5.77m.

9.3 Evidence suggests that external valuations of the stadium confirmed the council’s holding to be worth approximately £5m. As a shareholder the council would have been liable for 36% of the costs of repairs and refurbishment to the stadium, which by this time was 10 years old.

9.4 When asked about Member involvement throughout the above discussions, Kelvin Turner recalled that the Chief Executive had briefed Members about the offer; he was specific in recalling that the Elected Mayor, and Councillors Ibbs and Tappin were briefed by the Chief Executive prior to the final offer being made.

10. Instalments and Dividend Payment

10.1 The report presented to Council on the 14 June 2007 did not include any information relating to the proposal to accept payment by instalments. From discussion with Kelvin Turner, he explained that the details were removed because they hadn’t been finalised. The report was an “in principle” report; no final decision on instalments had been made at that time, therefore the report set out a summary proposal. ‘

10.2 During the period following approval (14 June 2007) to completion (21 December 2007) the instalment terms changed on at least 2 occasions. Initially (23/5/07) a completion payment
of £3.14m was proposed with 2 annual instalments of £680,000. This subsequently became £2.5m with instalments of £1 m, before finally becoming £2m with instalments of £1.25m.

There is an e-mail from Kelvin Turner to Gerry Clarke (27 September 2007) that requests amendment of the payment terms “following further discussions with Tony Scholes”. No evidence to support the basis for this reduction was available during the audit.

10.3 Examination of officer meeting notes (meeting held between City Council, Stoke City Football Club and St Modwen) undated: but estimated to have been made during June 2007, intimate that the Club, having agreed to a purchase price of £4.5m, were unlikely to increase their offer to accommodate interest charges;

” no circumstances in which the price to be paid for the shares will be increased in the future ”

10.4 In order to verify the amount of interest forgone, an exercise was carried out in February 2009, based on advice provided by the authority’s financial advisers (Sector Treasury Services). The outcome of the exercise reported that the effect of accepting payment by instalments estimated the potential interest foregone at £180,000. The interest forgone would have been lower, had the original proposal of a higher completion payment remained.

10.5 As early as July 2007, officers were aware that the club were offering a dividend as part of the deal. The club -proposed that £480,000 of the £4.5m be paid by declaring a dividend from the Development Company. As a shareholder in the company the City Council was entitled to receive dividend payments however there is a clause in the original agreement which prevents the declaration of any dividends whilst there is a loan outstanding.

10.6 The latest set of accounts (year ending 31/03/06) show that the value of loans outstanding was £740,000. It has been assumed that this is the loan which affects the clause relating to non-payment of dividend; however this has not been confirmed. Prior to December 2007, no dividends had been paid since the formation of the company.

10.7 Authorisation to receive part-payment by dividend was given by Kelvin Turner to Gerry Clarke on 25 September 2007. An e-mail from Kelvin Turner on 27 September sets out the arrangements which ultimately became the basis of the Share Sale Agreement. This
resulted from discussions Kelvin held with Tony Scholes. His intention was to take the detail to the Executive and Members’ Board for agreement.

10.8 Following the departure of Kelvin Turner in October 2007, the remainder of the sale process was overseen by Julie Gill. She has explained that she had considered the decision to accept the instalment payment based on the following criteria:

“¢ Calculations using an average interest rate of 5.25%, had demonstrated that
the amount of interest forgone was less than £200,000
“¢ This amount was therefore within the chief officer delegation range for
“¢ The substance of the deal remained the same’

10.9 An e-mail from Gerry Clarke to Julie Gill dated 23 October 2007 highlights that the provisions of the agreement ‘do not accord with what was agreed at full Council’.

10.10 A further mail also issued by Gerry Clarke to Julie Gill dated 7 November 2007, states that

‘last time we spoke you were going to speak to Steve to see if we needed to go back to full council to approve the changes to the deal reported to full council’. Having raised this with Steve Robinson and taking advice from Legal Services, it was confirmed that the sale could be finalised within the constitutional governance “,

without a return to council. Steve has explained that having briefed the relevant Members [who, were attending SDC Board meetings] about the issues of detail at the May meeting, there was no need for the report to go back to Council. He viewed the practice of taking the (June 2007) report to Council and subsequently finalising details with key members as recognised and established practice.

The report had been written to ensure that Councillors had full knowledge of the proposals, in particular the valuation and the price achieved, finalising the details within the constitution. The decision to stick to the original approach having taken the report to full Council was not in any way taken to avoid reporting further details, but simply to progress the transaction quickly and with the many other pressing issues that were going on at the time to ensure
that the Council’s recovery could be achieved as quickly as possible. Steve Robinson’s recollection is that at no time, either before or after the completion of the sale, did members raise concerns [with him] or request that the matter be referred back to Council. He felt that the roles of (former) Councillor Tappin and Councillor Ibbs as members of EMB and directors of the Stadium Development Company demonstrated their authorisation of the sale.

10.11 It is not clear which officer from within Legal Services provided the advice referred to above (10.10) to either Julie Gill or Steve Robinson.

10.12 An e-mail from Robert Thorley to Julie Gill confirms that he expects the Stadium Company’s accounts for the year ended November 2007 to show that the loan amount outstanding stands at £3/4m. This is acknowledged by Julie Gill in her response to Gerry Clarke to confirm the reason for no dividend having been paid prior to November 2007.

10.13 An extract from the minutes of SDC board meeting on 21 December (11 :OOam), at which Councillors Tappin and Ibbs were present, records that a dividend of £1,333,333 was declared and paid to the shareholders in the amounts of

“¢ Stoke on Trent City Council (36%) £480,000
“¢ Stoke on Trent Regeneration (15%) £200,000
“¢ Stoke City Football Club (49%) £180,000 (leaving £473,333 to pay)

Following the declaration of the dividend, a second and separate meeting (11: 15am) of the Board was held to deal with the completion requirements pursuant to the sale and purchase agreement. The meeting resolved to approve and register the transfer of the shares produced to the meeting. Having agreed to the sale of its shares in the SDC, the city council ceased to have an entitlement to representation on the Board and therefore Councillors Ibbs and Tappin resigned their directorships of the Stadium Development Company. It was resolved to accept the resignation letters with effect from the close of the meeting. Prior to the resolution of the Board to endorse the sale of the shares, it is understood that the Club’s legal representative went through the Agreement. However, it is Councillor Ibbs and (former)
Councillor Tappin’s view that the issue regarding staged payments was not discussed until after the deal had been concluded.

Furthermore, it is Councillor Ibbs and (former) Councillor
Tappins view that had they known about staged payments, they would have raised objections to the transfer at this time, the transaction could have been suspended, pending further discussions.

10.14 On the 21 December 2007, Share Sale Agreements (the City Council’s document having been signed by the Head of Legal Services/Monitoring Officer on behalf of the City Council for £4.02m; this being the £4.5m, net of the dividend payment of £480,000), were exchanged. The initial payment for the shares was received by the council on 20 December 2007 (£1,520,000). The dividend payment was received on 21 December 2007 (£480,000).
The first instalment of £1.25m was received on 21 December 2008; the second and final instalment of £1.25m was received on 21 December 2009.

10.15 It is believed that following the completion meeting, both Councillors Ibbs and Tappin returned to the Civic Centre to discuss the detail of the sale with council managers. At this time the Council Manager/Chief Executive was on annual leave and it is understood that discussions were held with the then Interim Assistant Chief Executive, Chris Harman.

10.16 Following the SDC Board meetings on 21 December, it is understood that although discussions took place between Councillors Ibbs and Tappin and senior council officers regarding the terms of the Agreement, no formal objection was raised. Based on the documents examined and discussions held, there appears to be no further evidence that any other reports were put to Council on the final payment terms agreed with Stoke City Football Club.

10.17 The Agreement to sell the council’s shares in SDC was signed on behalf of the Council by the Head of Legal Services/Monitoring Officer. Whilst he wasn’t present at the meeting on 21 December, he had signed the share sale agreement prior to the meeting.

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